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Sunday, 22 October 2017

How $5.5bn loan will ruin Nigeria — Economic expert, Henry Boyo

What are your thoughts on the Federal Government’s plan to borrow another $5.5 billion, which would be used to service existing debts and also sustain the tempo in the recovery of the economy that is just crawling out of recession?

I would like to think that the government knows what it is doing. But on closer examination of their reasons for borrowing and the reality on the ground, it would seem that they are either trying to consciously deceive the people or they really don’t understand. Even though as I said before now, a government being what it is with the paraphernalia of capable hands and minds, it is appropriate that one should think that they must know what they are doing. But unfortunately, when you now compare what they are saying and the platform on which they are basing their decisions with the actual reality on the ground, you will feel that they are either deliberately misleading the people or they themselves are ignorant.

My reason for saying so is very simple. And the reason is predicated on basic common sense, which is applicable on a personal level, corporate level and national level. What I am saying, therefore, is that their actions are not in consonance with common sense.

Why do you say so?

If you have a situation where debt service and payment is already critical and has become an acute problem, the common sense response would be that you should do two things particularly in governance; on a personal level too it is basically the same thing. Now, what you should normally do is to say, ‘let me cut down on my expenses; let me cut down the frivolities in the expense structure that I maintain on my consumption structure at the moment so that my total annual expenditure will reduce. If it reduces, I don’t have to borrow so much even if I have to borrow, because I had consciously reduced the amount that I spent last year that turned out to be too heavy to sustain.’ So, you first reduce your expenses as the rule. The second thing is to try to increase your sources of income. And how does government increase its source or sources of income? The primary source of government’s income is taxation.

Whether it’s on a personal, corporate or national level, that is the common sense approach. Now, can we see a common sense approach in government’s strategy? Has government attempted in any way to reduce its expenditure especially the recurrent expenditure? The answer is no. If they have, it can only the minimal because even in the time of Okonjo-Iweala as coordinating minister of the economy, we still borrowed because we continuously had a deficit, which meant the country had to borrow. We still found that despite the promises made that they would reduce recurrent expenditure to about 50 or 60 per cent of the annual budget, throughout the whole period, recurrent expenditure never fell below 65 per cent. So, only about 35 per cent was being made available for capital expenditure, and in most cases, the capital expenditure was never fully spent. The implication is that the expectation for increased infrastructure improvement was cut to half because the capital expenditure was often not executed and was carried over to the next year.

So, the first common sense approach is to reduce expenses. If they did anything or had any policies or programmes to reduce recurrent expenses such as removing ghost workers from salary structure; making sure that the salaries, allowances and other expenses of the National Assembly are reduced and making sure that you don’t spend N2.5 billion on State House clinic when a general hospital serving about 10 to 15 million people hasn’t got enough budget and things like that, then we have not seen the impact. They have not really reduced recurrent expenditure even though they tell us that they have expunged ghost workers from the civil service because the salary bill never seems to change.

But don’t you think that if they will have to drastically cut down the salary bill as you say, some people will have to lose their jobs and government officials say they don’t want to do that, hence the need to borrow for capital projects while working to improve income sources?

I think you miss the point. Are ghost workers part of a genuine labour force?No, but they had a programme through which they expunged ghost workers from the system, which means they had done something in that regard?

Thank you. That’s exactly what I’m saying; may be you did not get me right. I said that if you had a programme where you said 100, 000 ghost workers were taken out of the payroll, you would expect to see a reduction in the recurrent expenses bill. Or shouldn’t you? It is said that in the National Assembly and most government agencies buy the same typewriters and computers every year. If you say that you have closed the leakages of corruption, have you now stopped that? This is what I mean by plugging leakages and reducing expenses. I am not saying that people should be retrenched automatically. I’m saying that in order to ensure that you don’t enter into further debt, you do two things — reduce your expenses; and if the major areas of your expenses remain salaries and wages and things like that, then you are in the right direction if you say that you are shunting out the ghost workers and putting in a TSA project that captures all government income. These are all ways of trying to reduce wastages and leakages and all of that.

The point is that if you have done that, it should be reflected in your total recurrent expenditure for the next year or for the present year. So, if you say that you have done that and it is not reflected in your total recurrent expenditure, then you are either lying or as you are saving here, you are adding other expenses that are probably not feasible or realistic to your burden. And we have agreed that a ratio of 70 per cent recurrent expenditure against 30 per cent capital expenditure is not workable in an economy like ours.

So, government has not been able to take the first common sense step of reducing expenses; if anything the expenses seem to be growing and growing. From about N2 trillion total recurrent annual expenditure four or five years ago, we are now talking of annual recurrent expenditure of very close to N5 trillion. Not only that, you find that the debt burden has become so much that in order to service the loan (we are not talking of repaying the loan), they are already using, according to the IMF, almost 60 per cent of the actual tax revenue and other income that we earn. And that proportion increased by 20 per cent from about 40 to 45 per cent about two years ago to 60 per cent of your real income. Even the IMF that normally pushes us down the slope, so to say, are alarmed that we are using 60 per cent of our income to service debt. If you are earning N100 million and you are using N60 million to service debt, only N40 million is left for recurrent and capital expenditure and recurrent in this case is not even shrinking, it is growing. So, at the end of the day you will find that that 40 per cent that is left is not even enough for recurrent expenditure. So, when you have to borrow, you are borrowing to spend on recurrent expenditure as well as capital expenditure.

But the government is assuring that the fund it is seeking now will be spent on roads, rail and power infrastructure, which will generate economic activities that will create jobs and also generate revenue that will be used to service the debt…

(Cuts in) I will like to think that you are asking that question as an agent provocateur, which is what a journalist is supposed to be, anyway.

Well, I just want you to address the issue and educate the public…

That’s what I saying; you are right in asking the question because as a journalist, even if you know that that is wrong, you must ask your questions.

The observation I want you to make is to think about what you are saying and you will probably find that you are standing on sandy soil, because at the end of the day, you have believed erroneously that it is the amount of money that government spends either in recurrent expenditure or capital expenditure that drives the economy. And you are absolutely wrong. If your position is right, then of course as you have seen, the annual budget has been on the increase over the years, but have you found an increase in employment? Have you seen an increase in infrastructure that has added value to our lives? If the answer is no, then you are standing on a platform that does not even exist. If it exists, the analogy would hold that so long as they spend more every year, they would be providing the infrastructure and putting more people in jobs. But is that the reality? The answer is no. So, whomever that believes that has made a big mistake and is helping to misinform other people.

Sir, you know that we have an experience in this country where we had borrowed so much in the past but there was nothing on ground to justify the borrowing. But this government is relatively young in power. Don’t you think that Nigerians should give them the benefit of the doubt and support the borrowing plan but also police the fund to ensure that it is utilised for the purpose it is being acquired?

Well, put it this way. The government has been in power for two years or thereabouts and they have already borrowed in the past two years. But have you seen the impact of what they have done? The answer is no. And they are telling you that this time, over 50 per cent of what they want to borrow is not going to be applied to any physical infrastructure enhancement but to service local debt. It’s madness.

So, you are of the opinion that government should not borrow and allow Nigerians to continue to suffer the adverse effects of infrastructure deficit, which when reversed can unleash the economy?

I have been trying to explain to you step by step that even with all the monies that they have borrowed in the last 10 or 15 years as the case may be, there is no impact. Every year they have been borrowing. And you are saying why should I say they should not borrow because by borrowing they will improve your life; and I’m asking, for the 10 or 15 years that they have been borrowing, have you seen any positive indicator in your life either in the rate of employment, growth, infrastructure, etc. The answer is no, if you are honest with yourself. Now you are saying, ‘let’s forget about the two years that they have been there, that they are still young and we should allow them to borrow some more.’

Now, let me tell you once again — it’s not government expenditure that drives the kind of economy you are looking for. In fact, how much is the total government expenditure that you are putting so much hope on even with all the borrowing and everything like that. How much? This year we are talking of N7 trillion. N7 trillion is about $23 billion. Do you know what is required to make our power sector to work? Experts talk of about $100 billion. Meanwhile, you are talking of $23 billion taking us out of the quagmire. And only about 30 per cent of the $23 billion would be spent on infrastructure. Didn’t they do that in the past? Did you find any succour either in terms of greater number of people being employed, lower rate of inflation that will generate greater consumer demand or stronger naira? The answer is no. So, why should we follow that foolish path of saying let them keep repeating the same thing in the same manner and hoping that even though we did not get result the last time, we will get result this time. Can you see why I said you are standing on sandy soil?

So, the question now is, where does growth come from? Growth comes from the private sector. The amount of money available in the private sector for use is infinitely elastic. It is not N7 trillion. You can get the $100 billion required to fix the power sector in no time if you have the right policies on ground. It will come by itself. And you are asking me if I’m telling them not to spend N7 trillion. How much is N7 trillion that you are arguing about when 70 per cent of that amount will go into recurrent expenditure. Even when Obasanjo spent $18 billion on power what did you see?

You have said there is no common sense in borrowing foreign currency to service domestic debt, what is the danger in toeing that path?

Good question. Now, let me ask you something. Which debt is easier to control, the debt that you owe based on money that you print by yourself or the debt you owe based on money that is the property or under the control of another sovereign country? Which is easier to manage? The question is for you.

Well, it should be the money you print by yourself…

(Continues) God bless you. You are not asking yourself why is it that it is more expensive to borrow in your country where you have the control over the currency and over the economy. Why are you saying that it is cheaper to borrow from abroad? If it is cheaper to borrow abroad at seven or eight per cent as they are clamouring, why is it that in my own country I cannot organise that cost of funds don’t exceed seven per cent? Why should I say, ‘well I have given up on my country, the system is so hopeless; we can’t continue to borrow at 17 or 18 per cent, so let’s go and borrow from England or wherever?’ You abandon your position of strength to go to a position of weakness.

But that notwithstanding, you are unfortunately making a wrong assumption when you think that the rate of interest, which you pay on foreign loans is cheaper, as the Minister of Finance, Kemi Adeosun, said. But she has not questioned why the cost of funds here is high at 17 or 18 per cent compared to seven or eight per cent in those countries where they want to borrow from. I mean as finance minister, you should first of all interrogate the problem with the aim of proffering solutions. Okonjo-Iweala too in her time, when asked in one of the interviews she granted to a national newspaper, why the rate of interest is so high in Nigeria, said, ‘oh, I really don’t know; this is something I must interrogate with the banks.’ This is what Adeosun is also saying; she is confused.

But let’s see whether in fact it is cheaper to borrow from abroad at seven per cent interest rate than at home at 18 per cent rate. A $1 billion loan at seven per cent would require N150 billion plus seven per cent to service and repay when naira exchanged for N150=$1. Government would, however, require N300 billion of taxpayers’ funds plus seven per cent to service and repay the same loan when the naira exchange rate is N300=$1.

Clearly, so long as the persistent, inexplicable surplus naira liquidity challenge subsists, and the CBN’s forex auction system remains skewed against the naira, it is not a matter of if, but when the naira will tumble beyond N500=$1. When this ultimately happens, government would have to raise over N450 billion plus seven per cent to service and repay the same $1billion loan.

So, the amount of money you will pay even though your external loan is seven per cent, the naira that you have to gather up, it’s either you print it and pay; and if you do that you will exacerbate inflation. On the other hand, if you say you want to collect it from taxes and pay, which taxes are you going to collect in an environment where companies cannot even survive. So, it means that you might be using almost all the money collected from taxes genuinely to pay overseas debt. Is overseas debt cheaper then?

Now, naira has gone to N360 to $1. So, you are now paying the money twice compared to the local debt, which at 18 per cent you are still only paying 18 per cent. So, does it make sense for anyone to do what they are suggesting? And don’t tell me that, that cannot happen because in the last 10 years, we have seen the naira go from N125 to N150, N165, N190 and N360 at the moment; and it’s still very fragile.

Now, can you see that it’s either they are mischievous because they know this or…What I’m saying is not rocket science. And we are supposed to have people of timber and calibre there. If they cannot reason these two, three steps, then they cannot be what they say they are. This is the reality; I’m not making it up. When we continue in the trajectory we are going now, you find that we are going to doomsday. And I say this with all seriousness and caution because that is the reality.

But with our debt-to-GDP ratio reportedly standing at 19 per cent and one of the lowest in the world, isn’t that an indication that we still have enough room to borrow? The minister of finance said that much recently.

She said 19 per cent; the World Bank and some other sources said 25 per cent and even the Debt Management Office (DMO) said something like the threshold should be the ratio of about 20 to 25 per cent. But whatever they say, we know that we are nearing the limit. The point, however, is that the issue of debt-to-GDP ratio may be acceptable when the cost of your loans is modest or minimal. But when your debt to revenue ratio is already at 60 per cent, which means you are using 60 per cent of your annual income to service debt; and somebody says, ‘don’t worry, your debt level compared to your GDP is still very reasonable,’ you will be a fool to take that advice. The person telling you to do that is leading you like a goat down to the slaughter slab. The simple reason is that instead of 60 per cent of your revenue that you are now using to service debt, ultimately you will be using 70, 80 or 90 per cent as the case may be if you borrow more. So, does it make sense for anybody to wave the flag of debt-to-GDP ratio? The answer is no, if we are honest with ourselves.

At a point in this discussion, you advocated increase in tax as a means of revving up government revenue but down the line you also said that it would be difficult to tax individuals and corporates now because some of them can’t even survive. If government can’t tax the people and also can’t borrow, that’s a huge problem. How do you reconcile that because government is now trying to increase its tax drive through the Voluntary Asset and Income Declaration Scheme (VAIDS)?

Thank you! Government’s effort at increasing its revenue from tax now is against the grain of progressive economic development. Why? In an environment or any economy where there is contracting demand, and contracting demand is bad for industrialists and manufacturers, because contracting demand means that people are consuming less and less; and if people are consuming less and less, industries will close up because the demand is not enough to sustain them, like we are having now.

So, when you have a situation where industries are not thriving because of low consumer demand, what you ought to do as a government is to open up income flows and not to tax the people more. This is because you don’t want to capture the money in the system into that government budget where in the end nothing happens. So, you want more money in the hands of the people so they can buy more bread, milk, yam, garri and what have you; and create consumer demands that will drive industries. So, it is even wrong for the government to be making as its objective, collecting more tax from the people in the economic climate, which we have now.

In taxing people more, you are reducing consumer demand especially at a time when inflation is at 16 or 17 per cent. If you tax people more, it means that the people will have less to spend; meanwhile, the unseen hands of inflation has already stolen over 40 per cent of their income over the last two years. Now, they are saying that government should continue to increase tax on that small balance left with you. The economy will die.

Further taxation in an economy that is already dying will hasten the death of that economy. So, what we have to do now is to create an enabling environment for the private sector to thrive. The private sector is the galvaniser of economic growth. Until we recognise that the private sector is the engine of growth and not the small peanut spent by government, we won’t make progress.

In fact, if government does not build capital infrastructure and creates an avenue where the private sector is involved, the economy will boom. Look at all the government infrastructure that we have like the refineries, roads and all that; have they performed very well? No. So, why must we now say that government must continue to spend more whereas what they spent in the past has not had any positive impact in your life and in my life?

The private sector would be galvanised to employ more people and create much more goods if there is an enabling environment; in which case the more people they employ will pay tax, the more goods created will pay VAT, and companies will also pay tax. That is how economies grow.

And the private sector would thrive not through the instrument of more taxation or borrowing but through creating an enabling environment and that enabling environment is driven fundamentally by something that is so innocuous that people don’t even recognise it but they feel it. They feel the pangs and they transfer the aggression that the pangs cause to other things. And what is that thing — inflation. It’s innocuous. And the impressions of inflation lead to armed robbery, stealing in government and other vices because suddenly, the N1 million you are earning which gave you succour two years ago cannot take you anywhere anymore. And now because people are able to buy less and less, industries are collapsing and throwing more people into the job market, desperation sets in and people are ready to do all sorts of things to make money.

To reverse the situation, you have to create an enabling environment and this starts with reducing inflation. The question is how do we reduce inflation because it has a serial impact. If you can reduce inflation so that instead 15 to 20 per cent a year, it comes to five per cent; that immediately transfers money into peoples’ pocket. It might be the same money but you will be able to buy more in the course of the year. That is why inflation is the greatest enemy of government and should be the first battle line of any government that wants to grow an economy.

Look at countries that have done very well for themselves; you don’t see inflation going more than five per cent. So, what makes you think that your own case must be different; that you can exhibit an inflation rate of 16.5 per cent and expect that you will be able to compete with countries where inflation is two or three per cent. So, whatever the Monetary Policy Committee has been saying doesn’t make any meaning because they are talking round the point. Inflation is an economic ravager; it is the first battle station of any sensible government.

The rate of inflation determines consumer demand; consumer demand determines the extent of private sector activity; inflation dictates your cost of funds and cost of funds determines the competitiveness of the real sector, the competitiveness of your export. Higher cost of funds and higher inflation will drive a lower rate of exchange. I have explained this for 15 years but people don’t understand. If they understand what I am saying, it will be easy for them to know that they are following the path to Hades with the present economic management.